I went through the foreign earned income tax exclusion and the final screen showed me that all of my income qualifies to be excluded.
However, tax owed only shows Self-employment tax being excluded $2,627. The full amount is still taxable after the standard deduction of $13,850 AND Self-employment tax of $5,253 is added.
From the calculation it looks like Foreign Earned Income tax exclusion didn't do anything. Is this a Turbotax error or am I not correct to expect to pay $0 in taxes?
Full details:
Income source: self-employment, 3 clients
Physical presence: foreign resident since 05/2023; travel before, no time spent in the US
Legal: company formed abroad to get residency, hired myself as an employee, using foreign address for tax purposes.
Since you are self-employed, in general, you would still need to pay SE tax. This is not part of the exclusion. So you are not paying your ordinary income tax, just your SE (FICA) taxes.
Turbo tax still calculates income tax owed after the standard deduction. Here is the current calculation (I still have about 2.5k of expenses to add which will not change this by much).
Additionally, the income tax rate is 22% (4,554 of 20,697) while it should be 12% in the Single income bracket of $11,601-$47,150. Am I understanding correctly that this is another error?
if you are self-employed, you have self-employment tax to consider in addition to federal income tax. Also i am confused by your summary totals you put there. For an example, what is the deduction totals you have listed. This does not resemble any standard deduction amount I am aware of.
Reply back and give us a total of your net income for the year, minus the standard deduction amount so we can give you an accurate summation. Use this as a guide for Standard Deduction.
Note: I do not have W2 income and I did not enter it, just income & expenses in Schedule C.
Sounds like you need to review Form 2555, Foreign Earned Income Exclusion, if the income is not being correctly excluded on Form 1040.
If you are using TurboTax Desktop, in FORMS you can review the calculations and make entries/edit directly on the form.
In TurboTax Online, you will need to pay for your return to see the forms, or you can transfer your tax file to TurboTax Desktop. Here's info on How to Transfer from TurboTax Online to TurboTax Desktop.
You could delete Form 2555, and go through the interview again to re-create it. You should close the program, then clear your Cache and Cookies before doing this.
Here's more info on the Foreign Earned Income Exclusion.
@tanyamedukha , generally confused but also agreeing with my colleagues @DaveF1006 , @MarilynG1 and @Vanessa A .
If I assume that you are a US person ( citizen/GreenCard) , single and having left the USA on 05/xx/2023 with a self-employed foreign income of US$60,813 and ignoring any US income for this discussion
(a) you will not meet the Physical Presence Test ( on form 2555 ) till after 05/xx+2/2024. This assumes that host country is in Europe ( leaving US , taking an overnight flight, arriving next morning and the first full day in that country being 2 days later. Thus the test period of continuous is 05/xx+2/2023 till 05/XX+1/2024.
(b) only foreign earned income during 05/xx+2/2023 till 12/31/2023 are eligible for Foreign Earned Income Exclusion.
(c) I am assuming here that you entered the Foreign Income using Schedule-C ( because it is self-employment) and then make sure " Foreign Earned Income Exclusion" is worked on p--- TubroTax should automatically import the schedule-C income as foreign earned income for purposes of form 2555
(d) Schedule-C income would have triggered a Schedule-SE fill -- you don't have to do anything on and also enter 1/2 of SECA income as an adjustment on form 1040.
(e) thereafter you can enter any US income .
Is this what you did or ?
Note that even though the foreign income is excluded from US taxes, the tax bracket on any non-excluded income ( foreign or US sourced ) is based on your world income without regard to exclusion -- thus pushing you into a higher marginal rate.
Does this make sense ? or am I in total left field
By the way which country are you in ?
pk
Thank you @pk for your explanation regarding the exclusion process. Looks like self employment tax is taken from worldwide income after expenses but before the standard deduction.
To clarify, I do qualify for FEIE due to the physical presence test. I've been out of the US for several years now continuously. I just happen to have residency in a foreign country since May of last year.
Not to anyone reading this in the future. Turbo tax online's current version does not calculate Foreign Earned Income Tax exclusion correctly and should not be used for this purpose.
A correct calculation for someone qualifying for FEIE would remove all of their income tax and will leave only self-employment tax which is based on wages or business income after expenses. The percentage of self-employment tax will stay the same (15.3%) up to $160,200.
Hi, I have the same issue. Is there anyway to fix this or is Turbotax really incapable of excluding all of my foreign earned income like it should?
ps - I know I have to pay the SELF-EMPLOYMENT tax. But, I shouldn't have to pay any INCOME tax as I already pay income tax to my foreign government.
@bryto , cannot comment on TurboTax online . However, the Home & Business on Windows version is perfectly capable of dealing with complex filings with NO issue. My understanding though is that if you use the higher levels of TubroTax On line such as Home & Business ( or its equivalent ), you should have no issues. If you would like help, please let me know and I will; call on another "champ" / volunteer whom is familiar with the on-line version. Please let me know also about your full situation.
Thank you for your reply. I would appreciate any help.
My situation is relatively simple:
- Self-employed graphic designer.
- All income is earned abroad. I reside in Italy full time and have for over 20 yrs.
- Claim FEIE
- FTC for passive income on two AMERICAN accounts: 1099-INT -- won't appear as tax credit with turbotax and 1099-DIV which does appear as a tax credit. I pay foreign taxes to Italy on this interest.
If you need more information, let me know.
Thank you
@bryto , since your passive income source ( interest / dividends etc. ) is US and both US and Italy are taxing this, you need to resource the income US tax Purposes. You generally do this by filing a form 1116 and selecting the category as " certain income resourced by treaty " Here is a link to the US-Italy treaty, including the technical explanations:
Italy - Tax treaty documents | Internal Revenue Service (irs.gov)
However there are two issues here that you have to work through:
(a) the treaty requires the tax rate be limited to 10% -- in the UJSA you achieve this by reducing / adjusting the gross income resourced by treaty -- IRS publishes a table on the adjustment to use. There is also the limitation of form 1116 -- you get an allowable credit of lesser of actually paid or allocated US taxes on the same income.
(b) a second issue is because the foreign taxes paid/ accrued on this doubly taxed foreign income is probably under the safe harbor amount of US$300 per filer ( i.e. US$600 per joint filer ) but to claim this benefit ( and not use the form 1116), you need to resource the income that can only be done using the form 1116.
If you can provide me more exact figures of the situation , I can simulate on Home & Business copy I have and also do more search ( look at the statutes and words thereof ) on if it is possible to resource without using form 1116.
Is there more I can do for you ?
Hello and thank you for the quick response.
I have sorted out the FEIE issue with a turbo tax expert. My taxable income is now 0$ as it should be. This means I am actually not paying taxes on the bank interest or the dividends/capital gains because that income is well below the standard deduction -- the earned income is all deducted via the FEIE.
Now, should I even claim the FTC for the passive income? It's my understanding that the FTC can only offset "earned income" and since this is 0$ for the US, I wouldn't get a tax credit anyway?
Or, if I work through the FTC -- for only the passive income -- could I get a credit to reduce the amount I owe for self-employment tax?
@bryto ,
(a) Your question : "could I get a credit to reduce the amount I owe for self-employment tax?"
Self-employment Tax -- SECA is not eligible for Foreign Tax Treatment. However if your tax home country has a Totalization agreement with the US Social Security Admin (SSA), then you can choose to pay either to the USA or its equivalent org . in that other country. Generally one would make a choice based on long-term plans. See here --> U.S. International SSA Agreements | International Programs | SSA
(b) your question : " Now, should I even claim the FTC for the passive income? It's my understanding that the FTC can only offset "earned income" and since this is 0$ for the US, I wouldn't get a tax credit anyway?
First : Foreign Tax Credit is ONLY available for Unexcluded income. Your active income i.e. Foreign Earned Income Exclusion, is eligible for FEIE as well as Foreign Tax Credit / Deduction based on your choice on how you want to treat the income or the tax thereon.
Second : Passive incomes are eligible ONLY for Foreign Tax Credit or Deduction under SALT ( State And Local Tax ) limitation.
Third: The safe harbor allows for foreign tax credit (for up to US$300 per filer of a return) against your federal tax ( i.e. reduces your tax burden and not below zero ).
Fourth: Form 1116 ( when safe harbor is not available ), limits the Foreign Tax Credit to lesser of actual taxes paid/accrued to a Foreign Taxing authority OR that imposed by US Fed on the same doubly taxed income.
Does this help ? Is there more I can do for you ?